The Obama administration is relying heavily on outside contractors to implement a core component of healthcare reform as it races to set up a federal health insurance marketplace before 2014.

The fast-approaching deadline gives the administration little time to scrutinize private-sector partners for conflicts of interest.

The purchase of one of these contractors, Quality Software Services, Inc. (QSSI), by UnitedHealth Group, a major healthcare conglomerate, has sparked concerns about a potentially uneven playing field.

QSSI, a Maryland-based contractor, in January won a large contract to build a federal data services hub to help run the complex federal health insurance exchange.

It will be working with several other contractors, including CGI Federal, Inc., to create the technological architecture for the exchange.

The quiet nature of the transaction, which was not disclosed to the Securities and Exchange Commission (SEC), has fueled suspicion among industry insiders that UnitedHealth Group may be gaining an advantage for its subsidiary, UnitedHealthcare.

It is difficult to know QSSI’s precise role because its contract is not publicly available and the department of health and human services did not provide a copy. A draft statement of work issued by HHS and used for the bidding process offers a glimpse of what the contract requires.

It reveals QSSI will finalize technical and systems requirements to develop and deliver plan management services, which includes the certifying and decertifying of health plans offered on the exchange. Plan management services also entails monitoring agreements with health plans to ensure compliance.

The technology will wield massive flows of socio-economic and health information for populations around the country that an insurance company, if privy to, could use as valuable business intelligence to determine what markets to play in.

If an insurance company had influence over the information technology architecture used to run the exchange, it could interpret federal standards in a way to exclude competitors or make it more difficult for them to win approval, say some insurance experts. Or it could have an inside track on knowing how to design plans that meet the standards.

The contractors working on the exchange will also have responsibility over payment calculation for risk adjustment.

This program is intended to redistribute funding from plans that attract younger and healthier participants, and thus have lower costs, to plans that attract people with more chronic diseases.

The draft statement of work for the contract shows QSSI will also work on technical requirements to deliver financial management services, such as payment calculation for risk adjustment.

The prospect that a subsidiary of UnitedHealth Group could have a role in calculating the reallocation of federal funds among rival health plans has unnerved some industry insiders.

“Financial management services include the services necessary to spread risk among issuers and to accomplish financial interactions with issuers,” the document states. “The risk spreading services include but are not limited to: payment calculation for reinsurance, risk adjustment and risk corridors, along with required data collection to support these services.”

The contract, which underwent a full and open competition, was initially awarded to QSSI in September of 2011 and finalized in January.

A senior executive with Optum, the subsidiary of UnitedHealth Group which bought QSSI at the end of September, said his firm and UnitedHealthcare are entirely separate businesses despite belonging to the same parent company.

“UnitedHealthcare is a client of Optum, an arms-length client, separately reported financially and separately managed,” said Andy Slavitt, group executive vice president at Optum.

“Optum has a very simple mission and that is to engage in activities to make sure the healthcare system works better for all participants,” he said, citing services such as helping an employer or union manage pharmacy benefits or helping a health company implement technologies.”

One of the many reasons that we don’t want private health insurers to manage our health care funds is that they have mastered gaming health care risks.

In the Medicare program, private insurers have selectively marketed their Medicare Advantage products to healthier individuals, yet have been paid at higher rates based on the average health care needs of this older and sicker population. The Medicare administration attempted to correct for this by risk adjustment. That is, they increased payments for patients diagnosed with more significant disorders, while reducing payments for patients with minimal disorders. The insurers responded by coding not very sick patients as if they had more serious disorders – not frank fraud, but taking liberties with diagnoses. Instead of correcting the overpayment problem this actually further increased the amount of overpayments to the private insurers.

With the Affordable Care Act, do you believe that the private insurers have had an epiphany and now want to give patients and taxpayers the best health care value possible? If you think so, you don’t understand this industry.

Follow this timetable:

* The Obama administration decided to use outside contractors to build a federal data services hub to help run the federal health insurance exchange.

* One of the more important functions of that hub is to have responsibility over payment calculation for risk adjustment. “This program is intended to redistribute funding from plans that attract younger and healthier participants, and thus have lower costs, to plans that attract people with more chronic diseases.”

* Under a competitive process, the contract was awarded to Quality Software Services, Inc. (QSSI) in September 2011, and finalized in January 2012.

* Steve Larsen, a senior official at HHS “left the Center for Consumer Information and Insurance Oversight, the office tasked with crafting rules for the national exchange, in July to take a job with Optum.”

* In September 2012, QSSI was purchased by Optum, a subsidiary of UnitedHealth Group, the parent company of UnitedHealthcare, the largest insurer in the nation.

Lest anyone might suggest that Steve Larsen may have been involved in a nefarious plot to benefit UnitedHealth, former Rep. Earl Pomeroy, a registered lobbyist with Alston & Bird, which represents Aetna, “dismissed the notion that Larsen may have given Optum an unfair advantage.”

UnitedHeathcare’s stealth takeover of the administrative entity that will allow their subsidiary to supervise risk adjustment for the plans in the federal health insurance exchange should have us all concerned. Considering their prior bad behavior, should we trust them now that they have even greater control over risk adjustment? Think not.

Okay, it’s clear that the problem is that we have turned control of health care financing over to an industry that must place its own interests over those of patients. So what is the solution? Do we further increase regulatory oversight? History has shown that they will always meet their fundamental business obligations by finding other ways to skirt regulatory interventions, just as they found a way improve their return when risk adjustment was applied as a solution to their practice of favorable selection (selectively marketing the healthy).

No, it is not that they need more government oversight, because that clearly is an inadequate solution. Rather, the solution is that this industry needs to be replaced with a public program owned by the people of this nation. We need a public service model instead of a private business model of health care financing. We need a single payer national health program – an improved Medicare that covers everyone.

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Physicians for a National Health Program's blog serves to facilitate communication among physicians and the public. The views presented on this blog are those of the individual authors and do not necessarily represent the views of PNHP.